REPORT OF THE DIRECTOR OF CORPORATE SERVICES
TO THE: BUDGET COMMITTEE
ON: 6TH MARCH 2002
TITLE: ACCOUNTING FOR BAD DEBTS
This report is presented in response to a request from the Committee and sets out for
members' information the differing accountancy treatment of bad debts in respect of
Council Tax, business rates and sundry debtor accounts.
CONTACT OFFICER:
A F Hennessy
Tony Hennessy - Creditors & Debtors Manager
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1.
INTRODUCTION
1.1.
Debtors occur from 3 main areas of revenue raising:- Council Tax - local tax on domestic property
- Business Rates – local tax on business property
- Sundry Debtors – for various services provided by all directorates for which
a charge is made
1.2.
Debts are created in different ways for these 3 areas and the treatment of bad
debts is consequently also treated differently from the point of view of how these
are accounted for.
1.3.
In all cases however, bad debts can arise for similar reasons, i.e. a debtor has
become insolvent, has absconded, has deceased, has perhaps had the debt
remitted by a court of law.
1.4
Proper accounting practice will require that bad debts are dealt with in an
appropriate manner in the accounts of the local authority.
1.5
This report explores the differing processes for the treatment of bad debts for
each of these revenue services.
2.
COUNCIL TAX
2.1
Council Tax bills are generally raised annually at the start of the year and all
Council Taxpayers have the statutory right to pay their bills by 10 monthly
instalments. Local arrangements are also made to allow for payment by weekly
instalments for Council tenants and special arrangements to pay can also be
agreed to suit a taxpayer’s personal financial circumstances. Council Tax bills
can be varied during the year because of changing circumstances, e.g. moving
house, changes to benefit entitlement, and this can require revisions to payment.
2.2
Where Council Taxpayers fall into arrears there is a statutory process to be
followed in the recovery of debt involving the issue of reminders, a summons to
a magistrates court, a liability order obtained from the magistrate, attachment
orders against earnings or income support, use of the bailiffs, a charging order
and finally, if all else fails, application to magistrates for committal to prison.
2.3
If all reasonable attempts to recover debt, as set out in paragraph 2.2, have been
exhausted without success a debt will become a bad debt and is potentially
irrecoverable and should therefore be written off in the accounts of the authority.
2.4
Council Tax legislation has established a statutory process for making proper
provision for bad debts by requiring an estimate to be made of the balance on a
local authority’s Collection Fund, in which all Council Tax transactions are
accounted for, at 31st March of the year preceding that for which the tax is being
set and taking that balance into account when setting the tax levy.
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2.5
In determining the Collection Fund balance, comparison needs to be made
between the original estimate of the proportion of tax likely to be collected and
the progress of actual tax collected.
2.6
Members will be aware that this exercise is a feature of the annual budget setting
process and the revenue budget report to the Council in recent years has featured
an analysis of the Collection Fund position.
2.7
Apart from the first year of Council Tax in 1993/94, when a collection rate of
97.5% was set, the estimated collection rate has been 98%. Put another way, the
level of bad debts is expected to be no more than 2%.
2.8
The provision for the 2% bad debts is made within the estimated Council Tax
levy for each year by building it into the calculation of the taxbase, the effective
number of Band D properties it is expected that Council Tax will be collected
from.
2.9
By this means, the necessary provision is made in the appropriate year’s
accounts.
2.10
Irrecoverable bad debts for Council Tax will be written off to this provision as
and when the recovery process has been exhausted and a report has been made
to, and accepted by, the Lead Member for Corporate Services, recommending
irrecoverable bad debts should be written off.
2.11
It should be noted that in respect of Council Tax the bad debts provision has
accumulated over several years without write off’s being made to it because it
was believed the necessary statutory authority to write-off bad debts was never
created in legislation. This has now been resolved and some £7m of Council Tax
bad debts dating back as far as 1993/94 have been written off in 2001/02.
3.0
BUSINESS RATES
3.1
The billing, payment facilities and recovery options are broadly similar for
business rates as for Council Tax.
3.2
However, the accounting arrangements for business rates bad debts differ from
Council Tax because of the different financial arrangements, which govern the
distribution of the proceeds from Business Rates.
3.3
Whilst local authorities bill and collect business rates, the amounts collected are
paid into a national pool administered by the Government, who redistribute the
proceeds on a population basis to local authorities.
3.4
In determining the amounts to be paid over to the pool, local authorities are
allowed to set off against the amounts due to the pool the amounts of bad debts,
which it has written off as irrecoverable.
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3.5
Business rates bad debts are therefore effectively written off against the national
pool. Local authorities are therefore not required to keep a provision for bad
debts on business rates in their accounts.
3.6
The process for authorising business rates bad debts is as set out in paragraph
2.10 for Council Tax.
4.0
SUNDRY DEBTORS
4.1
There are many similarities in the principles of billing and recovery processes for
sundry debtors, business rates and Council Tax. However they differ in certain
aspects, notably:
- bills are raised generally following the provision of a service for which a
charge is made.
- the legal stage of the recovery process involves the county court rather than
the magistrate’s courts, and consequently the processes differ.
4.2
Where bad debts arise, they will do so for similar reasons as Council Tax and
business rates, and the process for authorising write-offs is also similar (see
paragraph 2.10), but the accounting treatment differs because they cannot be
levied upon all potential debtors as for Council Tax or against a Government
pool as for business rates. Instead, sundry debtor bad debts must be considered
within the context of the Council’s revenue budget.
4.3
The practice within Salford is that services are credited with the proceeds from
raising a sundry debtor account at the point at which it is raised.
4.4
Should a sundry debtor account become an irrecoverable bad debt it is written
off by charging it to a bad debts provision, which is kept corporately to maintain
an adequate provision to meet write-offs. The bad debt is not written back
against the original income credited to services, although this is a legitimate
alternative accounting mechanism.
4.5
The level of the sundry debtors bad debt provision is reviewed annually by
reference to CIPFA recommended guidelines and (generally) increased by
making contributions from the revenue account to maintain a prudent level
against future potential irrecoverable bad debts.
4.6
A view needs to be taken when setting annual revenue budgets whether a
contribution from the revenue account is likely to be needed to maintain a
prudent level of bad debt provision. Members will be aware that for 2002/03, a
contribution of £500,000 to the bad debt provision has been included, following
on from no contributions having been built into the last two budgets (although an
underspend at outturn in 2000/01 allowed a £300,000 contribution to be made).
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4.7
There has been a debate in recent years as to whether a corporate bad debt
provision is appropriate and whether services should be charged directly for any
bad debts written off. A District Audit report made several years ago
recommended the Council should charge services, but the then debtors system
was not conducive to facilitating this recommendation without a disproportionate
effort to administer and so was not implemented.
4.8
The introduction of the new SAP debtors systems now enables services to be
charged with write-offs of bad debts and this will be implemented from 2002/03.
At the same time, the £500,000 contribution to bad debts built into the revenue
budget can be used to fund the write-offs to services and so avoid directorates
needing to cut back in their services to meet the cost of write-offs.
4.9
In having to fund bad debts written off, directorates will have a vested interest in
supporting the pursuit of debt whereas this has not existed in the past through
having a corporate provision.
4.10
Other initiatives which engage directorates in the recovery of the debt, e.g.
avoiding the use of the Sundry debtor invoices for small debts, funding the use
of debt collection agencies and closer consultation, will help to keep down the
level and volume of debt and so limit the scope for the write-off of bad debts.
A F Hennessy
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